Is Agfeed Another Chinese Fraud?
Today, Agfeed (NASDAQ: FEED) announced that an investigation showed that its accounting staff and Chinese management team engaged in accounting improprieties over the first two quarters of 2011. The company also announced that its financial statements for 2009 and 2010 would be restated. As a result, CEO John Stadler tendered his resignation. The company will likely be delisted from the Nasdaq as a result of the findings. The stock has been halted after falling more than 25% Monday afternoon.
News of potential fraud in AgFeed originally broke on Benzinga Pro. Check it out here.
Agfeed has been the target of several class action lawsuits, as multiple firms have initiated investigations of the company. The suits claimed that the company's officers made misleading statements about the company's direction, particularly with regards to special charges taken over its animal nutrition business and bad debt payments. These allegations are what led to the investigation which uncovered improprieties over the company's assets. Complaints have also been made against the company's previous statements about record revenues, as well as large accounts receivables and low allowances for doubtful accounts.
Agfeed is a Chinese company that produces pork products. The company caters to the vast demand that Chinese consumer have for pork, as 63% of the meat eaten in China is pork. The US is also a big market, as many people consume bacon. Agfeed raises its pigs on a pair of breeder farms and generates most of its revenue from concentrate and complete hog feeds. Its pork is considered to be of the high end variety, as the company's founders are animal nutrition experts and the meat commands a premium in the market.
Agfeed had recently implemented a western style of production for their pork, and obtained a certification from the Chinese government that their pork is "Green Certified". The company is also working in a vastly growing segment, as a booming Chinese population and rising wages will increase the country's pork demands dramatically over the next few decades.
It remains to be seen if Agfeed follows in a long line of fraudulent Chinese companies that have been uncovered this year. The stock is currently halted, and it is possible that NASDAQ could leave it that way for several months, or delist the stock to the OTC market. This action provides yet another example of why investors need to be increasingly cautious in investing in Chinese companies, as they are not as heavily regulated as American companies.
Traders who believe that the pork industry will continue to see growth should consider the following options:
- Go long companies such as Zhongpin (NASDAQ: HOGS), Pilgrim's Pride (NYSE: PPC), or Hormel Foods (NYSE: HRL). These companies produce large amounts of pork and could be poised to take advantage if demand jumps.
- Purchase call options in those three companies. Investors with less of an appetite for risk could still see substantial returns if their stock prices appreciate.
Traders with a bearish outlook on the demand for pork will want to consider these options:
- Go short Zhongpin, Pilgrim's Pride or Hormel Foods. The companies could see their stock prices depreciate if their earnings fall short.
- Consider put options in those three companies. Traders could see gains if those companies' share prices fall.
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